<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the period ended September 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition Period from ____________ to ____________
COMMISSION FILE NUMBER: 0-29255
FASTNET CORPORATION
-------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
PENNSYLVANIA 23-2767197
------------ ----------
(STATE OR OTHER JURISDICTION (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
3864 COURTNEY STREET
TWO COURTNEY PLACE, SUITE 130
BETHLEHEM, PA 18017
------------- -----
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
(610) 266-6700
--------------
(REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE)
N/A
---
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
The number of shares of the registrant's Common stock outstanding as of
November 14, 2000 was 14,990,947.
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FASTNET CORPORATION
FORM 10-Q
SEPTEMBER 30, 2000
INDEX
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets - December 31, 1999 and
September 30, 2000 (unaudited) .....................................3
Consolidated Statements of Operations (unaudited) - Three and
Nine Months Ended September 30, 1999 and 2000 .....................4
Consolidated Statements of Cash Flows (unaudited) - Nine months
Ended September 30, 1999 and 2000 .................................5
Notes to Consolidated Financial Statements ..............................6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations................................................10
Item 3. Quantitative and Qualitative Disclosures About Market Risk ..........16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ...................................................16
Item 2. Changes in Securities and Use of Proceeds ...........................16
Item 3. Defaults Upon Senior Securities .....................................17
Item 4. Submission of Matters to a Vote of Security Holders .................17
Item 5. Other Information ...................................................17
Item 6. Exhibits and Reports on Form 8-K ....................................25
2
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
December 31, September 30,
1999 2000
------------- -------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................... $ 953,840 $ 1,958,105
Marketable securities ................................... -- 26,382,541
Accounts receivable, net ................................ 1,791,422 2,250,100
Offering costs .......................................... 1,336,605 --
Other current assets .................................... 469,605 930,464
------------- -------------
Total current assets ....................... 4,551,472 31,521,210
------------- -------------
PROPERTY AND EQUIPMENT, net .................................. 7,363,848 22,337,395
GOODWILL, net ................................................ 2,115,558 1,499,932
CUSTOMER LIST, net ........................................... 1,722,222 1,222,219
OTHER ASSETS ................................................. 86,476 460,588
------------- -------------
$ 15,839,576 $ 57,041,344
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt ....................... $ 12,985 $ 11,533
Current portion of capital lease obligations ............ 1,417,066 4,714,875
Accounts payable ........................................ 2,319,524 2,801,528
Accrued expenses ........................................ 1,708,896 1,735,136
Deferred revenues ....................................... 2,331,258 2,978,253
------------- -------------
Total current liabilities .................. 7,789,729 12,241,325
------------- -------------
LONG-TERM DEBT ............................................... 3,081,634 34,099
CAPITAL LEASE OBLIGATIONS .................................... 2,794,093 7,814,398
OTHER LIABILITIES ............................................ 810,322 44,459
COMMITMENTS AND CONTINGENCIES ................................ -- --
SHAREHOLDERS' EQUITY:
Preferred stock (10,000,000 shares authorized, 808,629
shares outstanding at December 31, 1999 and none
outstanding at September 30, 2000) .................... 5,460,653 --
Common stock (50,000,000 shares authorized, 7,546,984 and
14,990,947 shares outstanding at December 31, 1999 and
September 30, 2000) ................................... 4,798,924 64,204,990
Deferred compensation ................................... (364,149) (1,081,024)
Accumulated deficit ..................................... (7,531,630) (25,216,903)
Less- Treasury stock, at cost ........................... (1,000,000) (1,000,000)
------------- -------------
Total shareholders' equity ................. 1,363,798 36,907,063
------------- -------------
$ 15,839,576 $ 57,041,344
============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
3
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<TABLE>
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1999 2000 1999 2000
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES .................................. $ 2,294,822 $ 3,225,325 $ 5,846,374 $ 9,424,451
OPERATING EXPENSES:
Cost of revenues ....................... 1,411,507 3,860,150 3,933,725 9,502,160
Selling, general and administrative .... 2,117,686 6,214,916 3,911,189 14,944,414
Depreciation and amortization .......... 656,438 1,389,469 904,233 3,504,710
------------- ------------- ------------- -------------
4,185,631 11,464,535 8,749,147 27,951,284
------------- ------------- ------------- -------------
Operating loss ......................... (1,890,809) (8,239,210) (2,902,773) (18,526,833)
------------- ------------- ------------- -------------
OTHER INCOME (EXPENSE):
Interest income ........................ 23,560 632,556 34,305 1,647,308
Interest expense ....................... (140,912) (270,593) (262,499) (793,708)
Other .................................. 39 (7,290) 1,056 (12,040)
------------- ------------- ------------- -------------
(117,313) 354,673 (227,138) 841,560
------------- ------------- ------------- -------------
NET LOSS .................................. $ (2,008,122) $ (7,884,537) $ (3,129,911) $(17,685,273)
============= ============= ============= =============
BASIC AND DILUTED NET LOSS PER COMMON SHARE $ (0.27) $ (0.53) $ (0.44) $ (1.27)
============= ============= ============= =============
SHARES USED IN COMPUTING BASIC AND DILUTED
NET LOSS PER COMMON SHARE ................. 7,362,674 14,990,947 7,122,004 13,894,302
============= ============= ============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
4
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<TABLE>
FASTNET CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1999 2000
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss .................................................. $ (3,129,911) $(17,685,273)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities -
Depreciation and amortization ...................... 904,233 3,504,710
Amortization of debt discount ...................... -- 255,802
Amortization of deferred compensation .............. 113,204 275,858
Changes in operating assets and liabilities -
Decrease (increase) in assets -
Accounts receivable ......................... (155,075) (458,678)
Other assets ................................ (82,167) (834,971)
Increase (decrease) in liabilities -
Accounts payable and accrued expenses ....... 776,489 1,844,849
Deferred revenues ........................... 684,936 646,995
Other liabilities ........................... 788,889 (765,863)
------------- -------------
Net cash used in operating activities ... (99,402) (13,216,571)
------------- -------------
INVESTING ACTIVITIES:
Purchases of property and equipment ....................... (1,093,071) (7,627,087)
Cash paid for business acquisitions ....................... (400,199) --
Purchases of marketable securities, net ................... -- (26,382,541)
------------- -------------
Net cash used in investing activities ... (1,493,270) (34,009,628)
------------- -------------
FINANCING ACTIVITIES:
Proceeds from long-term debt .............................. 1,000,000 1,027,994
Repayments of long-term debt .............................. (140,407) (1,026,981)
Repayments of capital lease obligations ................... (176,137) (1,417,427)
Proceeds from issuance of Common stock, net ............... - 49,646,878
Proceeds from issuance of Series A Preferred stock, net ... 4,464,992 --
------------- -------------
Net cash provided by financing activities 5,148,448 48,230,464
------------- -------------
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................... 3,555,776 1,004,265
CASH AND CASH EQUIVALENTS, beginning of period ................. 256,782 953,840
------------- -------------
CASH AND CASH EQUIVALENTS, end of period ....................... $ 3,812,558 $ 1,958,105
============= =============
The accompanying notes are an integral part of these statements.
</TABLE>
5
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FASTNET CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Background
FASTNET Corporation and its subsidiaries ("FASTNET" or the "Company"),
a Pennsylvania corporation, have been providing Internet access services to its
customers since 1994. The Company is a growing business Internet communications,
Web hosting and colocation provider targeting small and medium sized enterprises
in selected high growth secondary markets in the Northeastern area of the United
States. The Company complements its Internet access services by delivering a
wide range of enhanced products and services that are designed to meet the needs
of its target customer base.
Quarterly Financial Information and Results of Operations
The accompanying unaudited financial information as of September 30,
2000 and for the three and nine months ended September 30, 1999 and 2000 has
been prepared in accordance with generally accepted accounting principles. In
the opinion of management, all significant adjustments, consisting of only
normal and recurring adjustments, have been included in the accompanying
unaudited financial statements. Operating results for the three and nine months
ended September 30, 2000 are not necessarily indicative of the results that may
be expected for the full year. While the Company believes that the disclosures
presented are adequate to make the information not misleading, these
consolidated financial statements should be read in conjunction with the
consolidated financial statements and the notes thereto included in the
Company's latest annual report on Form 10-K.
Principals of Consolidation
The accompanying consolidated financial statements include the accounts
of FASTNET and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
Management's Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles require management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Reclassifications
Certain reclassifications have been made to the prior year to conform
to the current year presentation.
(2) INITIAL PUBLIC OFFERING
On February 7, 2000, the Company completed its initial public offering
of 4,000,000 shares of Common stock at a price of $12.00 per share. An
additional 600,000 shares of Common stock were issued pursuant to the exercise
of the underwriters' over-allotment option. The Company received net proceeds of
approximately $49.6 million from the initial public offering and the exercise of
the over-allotment option. Immediately prior to the consummation of the
offering, a $3.1 million Convertible Note issued on May 28, 1998, converted into
2,033,334 shares of Common stock and 808,629 shares of Series A Convertible
Preferred stock converted into an equal number of Common stock.
6
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(3) CASH, CASH EQUIVALENTS AND MARKETABLE SECURITIES
FASTNET considers all highly liquid debt instruments with original
maturities of three months or less to be cash equivalents.
Management determines the appropriate classification of its investments
in debt and equity securities at the time of purchase and reevaluates such
determinations at each balance sheet date. As of September 30, 2000, all of the
Company's investments are classified as available for sale and are included in
marketable securities in the accompanying consolidated balance sheets.
The amortized cost of debt securities is adjusted for amortization of
premiums and accretion of discounts to maturity. Such amortization and accretion
as well as interest are included in interest income. Realized gains and losses
are included in other income in the accompanying consolidated statements of
operations. The cost of securities sold is based on the specific identification
method.
The Company's investments in debt and equity securities are diversified
among high-credit quality securities in accordance with the Company's investment
policy.
(4) PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
December 31, September 30,
1999 2000
------------- -------------
Equipment ................... $ 6,524,000 $ 19,814,000
Computer equipment .......... 1,217,000 1,754,000
Computer software ........... 713,000 1,430,000
Furniture and fixtures ...... 280,000 609,000
Leasehold improvements ...... 229,000 2,720,000
------------- -------------
8,963,000 26,327,000
Less-Accumulated depreciation
and amortization .......... (1,600,000) (3,989,000)
------------- -------------
$ 7,363,000 $ 22,338,000
============= =============
Depreciation and amortization expense for the three months ended September 30,
1999 and 2000 and the nine months ended September 30, 1999 and 2000 was
$656,438, $1.4 million, $904,233 and $3.5 million, respectively. The net
carrying value of property and equipment under capital leases was $4.1 million
and $12.5 million at December 31, 1999 and September 30, 2000, respectively.
7
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(5) DEBT
On October 25, 2000, the Company entered into an agreement with an
investor to provide the Company with financial advisory services. The agreement
expires on June 30, 2001. In exchange for these services, the Company issued a
Convertible Note for $1.0 million. This note is due on October 24, 2003 and is
convertible into Common stock at $1.00 per share above the closing price on the
date of the agreement, which was $1.13 per share. No interest or dividends are
payable on this note. In connection with this note, the Company paid a retainer
of $50,000 and issued a warrant to purchase 600,000 shares of the Company's
Common stock at an exercise price of $1.13, the fair market value of the Common
stock on the date of grant. The warrant was immediately vested, and expires in
10 years. As a result of the financial advisory services rendered through
September 30, 2000, the Company incurred approximately $250,000 in fees which
has been included in Selling, General, and Administrative expense during the
third quarter of 2000.
On January 19, 2000, the Company sold a $1.0 million note to an
investor with a warrant to purchase 30,000 shares of Common stock. The note bore
interest at 7% per annum and matured upon the completion of the initial public
offering. The warrant is exercisable at $12 per share and expires on January 18,
2007. The warrant was valued at $256,000 using the Black Scholes pricing model
and recorded as a debt discount, which was amortized to interest expense upon
repayment of the note, which occurred with the proceeds from the initial public
offering.
Immediately prior to the consummation of the Company's initial public
offering, the $3.1 million Convertible Note converted into 2,033,334 shares of
Common stock. In addition, with a portion of the proceeds from the Company's
initial public offering the Company repaid a $500,000 obligation for financial
advisory services rendered during 1999, which was included in Other Liabilities
in the accompanying consolidated balance sheets as of December 31, 1999.
(6) COMMON STOCK OPTIONS
On June 23, 2000, the Company's shareholders approved an amendment to
the Equity Compensation Plan (the "Plan"). The Plan provides for the issuance of
up to 3,000,000 shares of Common stock for incentive stock options ("ISOs"),
nonqualified stock options ("NQSOs") and restricted shares. ISOs are granted
with exercise prices at or above fair value as determined by the Board of
Directors. NQSOs are granted with exercise prices determined by the Board of
Directors. Each option expires on such date as the Board of Directors may
determine, generally ten years from the date of grant.
The Company applies APB Opinion No.25, "Accounting for Stock Issued to
Employees," and the related interpretations in accounting for options issued to
employees under the Plan. Accordingly, compensation expense is recognized for
the intrinsic value (the difference between the exercise price and the fair
value of the Company's Common stock) on the date of grant. Compensation, if any,
is deferred and charged to expense over the respective vesting period.
On February 28, 2000, certain members of the Company's Board of
Directors were granted a total of 220,000 options to purchase Common stock of
which 20,000 options vested immediately and the remaining 200,000 will vest
quarterly over a period of five years. The exercise price of these options is
$9.25 per share and the fair value of the Company's Common stock on the date of
grant was $12.44 per share. As a result of these grants, the Company recorded
deferred compensation of $701,800. In addition to these grants, during February
2000, the Company granted 53,491 options to purchase Common stock to certain
employees at an exercise price of $9.25 per share when the fair value of the
Common stock was $14.69 per share, which resulted in deferred compensation of
$290,993. These options generally vest over a five-year term.
8
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(7) LEASE ARRANGEMENT
During the first quarter of 2000, the Company received a credit line of
$3.0 million from a vendor to purchase equipment. In April 2000, the same vendor
added a second credit facility of $5.0 million to the original credit facility.
These credit facilities are used to secure computer-related equipment under
three-year capital leases. As of September 30, 2000, the Company had $2.9
million available under these lease arrangements.
(8) NEW ACCOUNTING PRONOUNCEMENTS
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin ("SAB") No. 101, "Revenue Recognition in Financial
Statements." The bulletin is based upon existing accounting rules and provides
specific guidance on how those accounting rules should be applied. SAB No. 101
is effective for the fourth quarter of fiscal years beginning after December 15,
1999. Management believes its revenue recognition accounting policies are in
compliance with the provisions of SAB No. 101.
(9) NET LOSS PER COMMON SHARE
The Company has presented net loss per share pursuant to Statement of
Financial Accounting Standards No. 128, "Earnings per Share." Basic net loss per
share was computed by dividing net loss by the weighted average number of shares
of Common stock outstanding during the period. Diluted net loss per share
reflects the potential dilution from the exercise or conversion of securities
into Common stock, such as stock options. Diluted net loss per share is the same
as basic net loss per share as no additional shares for potential dilution from
the exercise of securities into Common stock are included in the denominator as
the result is antidilutive due to the Company's losses.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH OUR FINANCIAL STATEMENTS AND THE RELATED NOTES TO THE FINANCIAL STATEMENTS
APPEARING ELSEWHERE IN THIS FORM 10-Q. THE FOLLOWING INCLUDES A NUMBER OF
FORWARD-LOOKING STATEMENTS THAT REFLECT OUR CURRENT VIEWS WITH RESPECT TO FUTURE
EVENTS AND FINANCIAL PERFORMANCE. WE USE WORDS SUCH AS ANTICIPATES, BELIEVES,
EXPECTS, FUTURE, AND INTENDS, AND SIMILAR EXPRESSIONS TO IDENTIFY
FORWARD-LOOKING STATEMENTS. YOU SHOULD NOT PLACE UNDUE RELIANCE ON THESE
FORWARD- LOOKING STATEMENTS, WHICH APPLY ONLY AS OF THE DATE OF THIS QUARTERLY
REPORT ON FORM 10-Q. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO RISKS AND
UNCERTAINTIES THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR OUR PREDICTIONS.
OVERVIEW
FASTNET Corporation began providing Internet access services to its
customers in 1994. In 1998, we began to implement our current strategy of
providing Internet access and enhanced products and services to small and medium
sized enterprises in selected high growth markets beyond our original markets in
Allentown, Pennsylvania and the areas surrounding Philadelphia, Pennsylvania.
As of September 30, 2000, we provided Internet access and enhanced
services to approximately 670 enterprise customers, approximately 19,100 Home
and Small Office (HASO) customers, and 7,400 customers using our Web hosting,
and colocation services.
On July 30, 1999 we acquired Internet Unlimited, Inc., a Web hosting
and colocation company located in Bethlehem, Pennsylvania. As a result of this
acquisition, we increased the number of customers using our Web hosting
services.
In August 1999, we sold 666,198 shares of Series A Convertible
Preferred stock to purchasers including Lucent Technologies, Inc at $7.13 per
share. The net proceeds from these sales of Series A Convertible Preferred stock
were approximately $4.5 million. All of the outstanding Preferred stock
automatically converted into Common stock immediately prior to the consummation
of the initial public offering in February 2000.
On January 19, 2000, the Company issued a $1.0 million note to an
investor with a warrant to purchase 30,000 shares of Common stock. The note bore
interest at 7% per annum and matured upon the completion of the initial public
offering. The proceeds of this note were used to satisfy working capital
requirements. This note was repaid upon consummation of the initial public
offering.
On February 7, 2000, the Company completed its initial public offering
of 4,000,000 shares of Common stock at a price of $12.00 per share. On March 7,
2000 the Company sold 600,000 shares of Common stock at a price of $12.00 per
share pursuant to the exercise of the underwriter's over-allotment option. The
Company received aggregate net cash proceeds of approximately $49.6 million from
the initial public offering and exercise of the over-allotment option.
OUR HISTORY OF OPERATING LOSSES
We have incurred operating losses in each year since our inception and
expect our losses to continue as we execute our business plan. Our operating
losses as a percent of revenues were 8% for the year ended December 31, 1997,
20% for the year ended December 31, 1998, and 63% for the year ended 1999. Our
operating losses increased to 256% of revenues in the third quarter of 2000 up
from 82% of revenues in the third quarter of 1999.
10
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RECENT DEVELOPMENTS
On October 10, 2000, we announced a modification to our strategic plan.
This modified plan called for the suspension of selling and marketing efforts in
12 of the 20 markets that were operational as of September 30, 2000. Selling and
marketing efforts will be focused on eight markets located in Pennsylvania and
New Jersey. We anticipate we will re-deploy our marketing and field sales
activities in these suspended markets as we successfully execute our revised
business model in the eight fully operational markets. The Company has also
shifted its sales model to a consultative, face-to-face approach from the
centralized telemarketing approach previously used. Management believes this
increased focus on a smaller number of markets in conjunction with the
consultative sales approach will enable the Company to engage more customers in
the target markets and retain those customers for longer periods of time. The
Company is also building a customer-centric culture highlighted by superior
customer support and technical support departments. We expect this increased
focus on customer care will help us build and maintain long-term relationships
with our customers. We have shifted our focus from selling Internet access based
on pricing competitiveness to focusing on building a reputation of being an
authority on Internet enabled solutions with exceptional customer care.
Our modified plan includes redesigning our network architecture and an
overall reduction in telecommunication expenses. We will reduce the outbound
bandwidth in the 12 markets where field sales efforts are being suspended and
reconfigure the network and CNF architecture in the eight operational markets
while still achieving reliability and redundancy of the network by maintaining
multiple connections to worldwide Internet backbones. We believe these changes
will have a significant favorable impact on our gross margins which will be
evident starting in the fourth quarter of 2000.
On October 10, 2000, we terminated 44 employees throughout all
departments of the Company. This payroll and related expense reduction will
result in reduced cash consumption and expense reduction, primarily in Selling,
General, and Administrative expense.
In addition to these cost containment actions, we have reduced the
planned capital expenditures during the fourth quarter of 2000 through 2001 as
well as instituted a company-wide cost reduction effort. As a result of our
modified strategic plan, we believe that the cash and investments we have
available will be sufficient to fund operations at least through the end of
2001.
Simultaneous with the modification of our strategic plan, we will
record a non-recurring charge primarily related to network and telecommunication
optimization and cost reduction, facility exit costs, realigned marketing
strategy, and involuntary employee terminations. While we believe our modified
plan will reduce our cash consumption rate in the future, these actions may
result in early termination payments for certain contractual obligations that
exist. For example, on March 22, 2000, we entered into an agreement with a
telecommunications provider for Internet services. This agreement enables us to
purchase network and Internet access services at discounted rates from the
provider. The agreement has a 30 month term and includes an annual volume
commitment of $6.6 million. As a result of the modification of our business
strategy in October 2000, we do not believe we will meet the annual volume
commitment and are currently negotiating a new arrangement with the provider. If
we are not successful in these negotiations, then a payment equal to the annual
contract shortfall will be due to the service provider. We believe we will be
able to modify the terms of the agreement.
11
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RESULTS OF OPERATIONS
REVENUES
We provide services to our customers, which we classify in three
general types: Internet access and enhanced services, home and small office
(HASO) access, and Dialplex virtual private network (VPN) services. We target
our Internet access and enhanced services to small and medium sized enterprises
(SME) located within our active markets. FASTNET offers a broad range of
dedicated access solutions including T-1, T-3, Frame Relay, SMDS, and enterprise
class Digital Subscriber Line (DSL) services. Our enhanced services are
complementary to dedicated access and include Managed Backup, Total Managed
Security, e-mail based Unified Messaging, and the sale of third party hardware
and software. We also classify our dedicated and shared Web hosting and
colocation services as part of our enhanced services. Our business plan focuses
on the core service offering of Internet access coupled with increased sales of
enhanced products and services as our customers' Internet needs expand. Access
and enhanced revenues are recognized as services are provided. We expect our
access and enhanced revenues to increase as a percentage of our total revenues
as we continue to focus additional resources on marketing and promoting these
services.
Our HASO revenues consist of dial-up Internet access to both
residential and business customers, residential DSL Internet access, and
Integrated Services Digital Network (ISDN) Internet access. Customers using our
HASO services generally sign service contracts for one to two years. We
typically bill these services in advance of providing services. As a result,
revenues are deferred until such time as services are rendered. In the future as
we execute our modified business plan, we expect HASO revenues to decrease as a
percentage of total revenues. We have reduced selling and marketing efforts
targeted to this customer base in response to increased competition from both
free Internet service providers and other providers.
We also offer our customers Dialplex virtual private network (VPN)
solutions. VPN's allow business customers secure, remote access to their
internal networks through a connection to FASTNET's network. The cost of these
services varies with the scope of the services provided. One customer,
Microsoft's WebTV Networks accounted for 20% of our total revenues during the
three months ended September 30, 2000. Effective September 1, 2000, we renewed
our annual contract with WebTV. The contract included a price reduction for the
services the Company provided to this customer.
COST OF REVENUES
Our cost of revenues primarily consists of our Internet connectivity
charges and network charges. These are our costs of directly connecting to
multiple Internet backbones and maintaining our network. We also classify
engineering payroll and related expenses, the cost of third party hardware and
software we sell to our customers, facility rental expense for CNF sites, and
rental expense on network equipment financed under operating leases as cost of
revenues.
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 1999
REVENUES. Revenues increased by $931,000 or 41% to $3.2 million for the three
months ended September 30, 2000, compared to $2.3 million for the three months
ended September 30, 1999. This increase in revenues is primarily attributable to
an increase in the number of customers using our services. In addition, the
acquisition of Internet Unlimited in July 1999 accounted for $437,000 of
revenues in the third quarter of 2000 as compared to $208,000 for the same
period in the previous year. Partially offsetting our increase in customers was
a decline in the average revenue per customer from our directly connected
customers. This decline in average revenue per customer is in part due to lower
revenues generated from directly connected customers that use DSL connections
rather than classic T-1 connections and from downward pricing pressure in
response to competition in our new markets for classic T-1 and higher connection
speeds. In addition to the reduction in average revenues per customer, we are
experiencing a decline in revenue from our largest Dialplex customer,
Microsoft's WebTV.
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During the third quarter of 2000 and the third quarter of 1999, we derived a
significant portion of our revenues from Microsoft's WebTV Networks. In the
third quarter of 2000, we derived $636,000 or 20% of our revenues as compared to
$441,000 or 19% of our revenues for the third quarter of 1999. We expect that
revenues from Microsoft's WebTV Networks will represent approximately 20% of our
revenues for the year ended December 31, 2000, but will decline to between 12%
and 15% of revenues in the fourth quarter of 2000. This anticipated decline is a
result of the price reduction contained in the new contract effective September
1, 2000.
COST OF REVENUES. Cost of revenues increased by $2.5 million, or 173%, to $3.9
million for the third quarter of 2000 compared to $1.4 million for the third
quarter of 1999. Cost of revenues increased to 120% of revenues for the third
quarter of 2000 compared to 62% of revenues for the third quarter of 1999. This
increase is primarily attributable to the increase in Internet access and
telecommunication charges as we grew from three CNF sites in operation at the
end of the third quarter of 1999 to 20 CNF sites in operation at the end of the
third quarter of 2000, as well as headcount costs relating to additional
engineering staff needed to support our planned expansion ahead of generating
revenues. Gross margins decreased from 38% in the third quarter of 1999 to (20)%
in the third quarter of 2000. This decrease in gross margin was a result of
installation of telecommunication circuits in new markets ahead of revenues in
those new markets and an increase in engineering personnel. We expect our gross
margins to significantly improve as a result of the network and
telecommunication infrastructure modification initiated during the fourth
quarter of 2000.
SELLING, GENERAL, AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $4.1 million or 193% to $6.2 million for the third quarter
of 2000 compared to $2.1 million for the third quarter 1999. This increase is
primarily attributable to an increase in selling, general and administrative
personnel from 63 at September 30, 1999 to 135 at September 30, 2000. Another
factor causing this increase was the acquisition of Internet Unlimited, which
added personnel, rent expense and other selling, general and administrative
expenses.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization increased by
$733,000, or 112% to $1.4 million for the third quarter of 2000 compared to
$656,000 for the third quarter of 1999. This increase was primarily attributable
to the purchase of equipment necessary to support the expansion of our Network
Operations Center, as well as, the increased depreciation for the equipment
located in the 20 CNF sites in operation at the end of the third quarter of 2000
compared to the 3 CNF sites in operation at the end of the third quarter of
1999. Also contributing to the increase was $371,000 of amortization expense for
the three months ended September 30, 2000 that related to the intangible assets
recorded in the purchase accounting of Internet Unlimited.
OTHER INCOME/EXPENSE. Interest income increased by $609,000 from $24,000 in the
third quarter of 1999 to $633,000 in the third quarter of 2000. This increase is
attributable to the investment of the proceeds from the initial public offering.
Interest expense increased by $130,000 from $141,000 in the third quarter of
1999 to $271,000 in the third quarter of 2000, as we financed equipment needed
for our CNF deployment under capital lease arrangements. We expect interest
income to decrease as we use our cash to fund our operating losses and interest
expense to increase as we continue to service our capital lease obligations. We
expect the rate of growth of our capital lease obligations to slow as we have
sufficient telecommunication equipment to support our planned growth through
2001.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THE NINE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES. Revenues increased by $3.6 million, or 61% to $9.4 million for the
nine months ended September 30, 2000, compared to $5.8 million for the nine
months ended September 30, 1999. This increase in revenues is primarily
attributable to an increase in the number of customers using our services. In
addition, the acquisition of Internet Unlimited in July 1999, accounted for $1.3
million of revenues in the nine month period ending September 30, 2000 as
compared to $208,000 in the same period in 1999.
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During the nine months ended September 30, 2000, we derived a significant
portion of our revenues from Microsoft's WebTV Networks. In the first nine
months of 2000, we derived $2.2 million or 23% of our revenues as compared to
$1.1 million or 19% of our revenues for the first nine months of 1999. We have
experienced both customer number and revenue growth during the nine-month period
ended September 30, 2000 over the same nine-month period in 1999. While both
customer numbers and revenue have increased they have grown at a slower rate
than expected as a result of these factors: (i) decline in average revenue per
customer from our directly connected customers. This decline is in part due to
lower revenues generated from directly connected customers that use DSL
connections rather than classic T-1 connections and from downward pricing
pressure in response to competition, (ii) decline in revenues from our largest
customer, and (iii) a reduction in the level of service used by another of our
large customers beginning in the second quarter of 2000.
COST OF REVENUES. Cost of revenues increased by $5.6 million or 142% to $9.5
million for the nine months ended September 30, 2000 compared to $3.9 million
for the nine months ended September 30, 1999. Cost of revenues increased to 101%
of revenues for the nine months ended September 30, 2000 compared to 67% of
revenues for the nine months ended September 30, 1999. This increase is
primarily attributable to the increase in Internet access and telecommunication
charges as we grew from 3 CNF sites in operation at the end of September 30,
1999 to 20 CNF sites in operation at the end of September 30, 2000, as well as
headcount costs relating to additional engineering staff needed to support our
planned expansion ahead of generating revenue.
SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
expenses increased by $11.0 million or 282% to $14.9 million for the nine months
ended September 30, 2000 compared to $3.9 million for the nine months ended
September 30, 1999. This increase is primarily the result of continuing to hire
sales and general and administrative personnel. Our head count was 63 at
September 30, 1999 and grew to 135 at September 30, 2000 in anticipation of our
expected growth. Another factor causing this increase was the acquisition of
Internet Unlimited, which added personnel, rent expense and other selling,
general and administrative expenses. In addition, the Company recorded
approximately $705,000 in one-time charges during the nine months ended
September 30, 2000 related to one-time compensation charges and imputed interest
associated with warrants attached to the January 2000 bridge financing.
OTHER INCOME/EXPENSE. Interest income increased by $1.6 million from $34,000 for
the nine months ended September 30, 1999 compared to $1.6 million for the nine
months ended September 30, 2000. This increase is attributable to the investment
of the proceeds from the initial public offering. Interest expense increased by
$531,000 from $262,000 in the nine months ended September 30, 1999 to $794,000
in the nine months ended September 30, 2000, as we financed network equipment
needed for CNF deployment under capital lease arrangements. We expect interest
income to decrease as we use our cash to fund our operating losses and interest
expense to increase as we continue to service our capital lease obligations. We
expect the rate of growth of our capital lease obligations to slow as we reduce
our planned rate of new market expansion.
CASH FLOWS ANALYSIS
Nine Months
Ended September 30,
1999 2000
------------- -------------
OTHER FINANCIAL DATA:
Cash flows used in operating activities ........ $ (99,000) $(13,217,000)
Cash flows used in investing activities ........ (1,493,000) (34,010,000)
Cash flows provided by financing activities .... 5,148,000 48,231,000
------------- -------------
Net increase in cash and cash equivalents ...... $ 3,556,000 $ 1,004,000
============= =============
Cash flows from operating activities decreased by $13.1 million from
cash used of $99,000 in the nine months ended September 30, 1999 to cash used of
$13.2 million in the nine months ended September 30, 2000. This decrease is
primarily the result of our net loss of $17.7 million. The increase in net loss
is primarily a result of an increase in personnel from 77 at September 30, 1999
to 169 at September 30, 2000 along with an increase in telecommunication charges
and an increase in selling, general and administrative expenses to support the
planned expansion of the Company. We expect to continue to incur losses until
the regional CNF sites produce sufficient revenues to cover their operating
costs and the corporate overhead expenses.
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Cash used in investing activities increased from $1.5 million in the
nine months ended September 30, 1999 to $34.0 million in the nine months ended
September 30, 2000, an increase of $32.5 million. This increase in cash outflows
is primarily attributable to the Company's investments in marketable securities
and an increase in purchases of property and equipment.
Cash flows from financing activities increased by $43.1 million from
cash inflows of $5.1 million during the nine months ended September 30, 1999 to
$48.2 million during the nine months ended September 30, 2000. The increase in
cash flows from financing activities is a result of the proceeds from the
Company's initial public offering and exercise of the underwriters' over
allotment partially offset by the repayments of capital lease and debt
obligations.
LIQUIDITY AND CAPITAL RESOURCES
Our business plan has required, and is expected to continue to require,
substantial capital to fund operations, capital expenditures, expansion of sales
and marketing capabilities, and acquisitions. We modified our business strategy
in October 2000 (see "Recent Developments") to allow us to maintain operations
without any additional funding in the foreseeable future. Simultaneous with the
modification of our strategic plan, we will record a non-recurring charge
primarily related to network and telecommunication optimization and cost
reduction, facility exit costs, realigned marketing strategy, and involuntary
employee terminations. We expect these actions will reduce our cash consumption
rate in the future, but may result in early termination payments for certain
contractual obligations that exist. We believe that the cash and investments we
have available will be sufficient to fund operations at least through the end of
2001.
Prior to our initial public offering, we satisfied our cash
requirements primarily through debt and equity financings.
In May 1998, we issued 1,000,000 shares of our Common stock, a
convertible promissory note of $3.1 million and a warrant to purchase 1,000,000
shares of our Common stock at an exercise price of $1.50 per share to H&Q You
Tools Investment Holding, L.P. for an aggregate of approximately $3.3 million in
cash. In connection with this financing, we granted H&Q You Tools Investment
Holding, L.P. a security interest in substantially all of our assets. H&Q You
Tools Investment Holding, L.P. converted this note into 2,033,334 shares of
Common stock and released its security interest immediately prior to our initial
public offering. We used a portion of the proceeds from this May 1998 financing
to repurchase outstanding shares of our Common stock representing 50% of our
then outstanding shares of Common stock for $1.0 million.
In May 1999, we issued a $1.0 million convertible note to H&Q You Tools
Investment Holding, L.P. for $1.0 million in cash. The principal amount of this
note and accrued interest was converted into 142,431 shares of Series A
Convertible Preferred stock at $7.13 per share in August 1999. In July 1999, we
used a portion of the proceeds from this financing to acquire Internet
Unlimited, Inc. a provider of Web hosting and colocation services, for $400,000
in cash and 546,984 shares of Common stock.
In August 1999, we sold 666,198 shares of Series A Convertible
Preferred stock to purchasers including Lucent Technologies, Inc. at $7.13 per
share. The net proceeds from these sales of Series A Convertible Preferred stock
were approximately $4.5 million. All of the outstanding Preferred stock
automatically converted into Common stock immediately prior to the consummation
of the initial public offering.
In June 1999, we entered into an agreement with Ascend Credit
Corporation for a $20 million equipment lease facility. Under this arrangement,
we lease equipment necessary for the construction of our customer network
facilities. Currently, we have approximately $13.2 million available under this
facility.
In January 2000, we entered into an agreement under which we issued a
$1.0 million note to H&Q You Tools Investment Holding, L.P. The note bore
interest at a rate equal to 7% per annum and was fully repaid on March 2, 2000
with proceeds from the initial public offering.
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As of September 30, 2000, our cash and cash equivalents and marketable
securities were $28.3 million. We believe that our existing cash and cash
equivalents, marketable securities, and available financing under existing
equipment lease facilities will be sufficient to meet our working capital and
capital expenditure requirements for at least the next 12 months. However, we
may be required to seek additional sources of financing. If additional funds are
raised through the issuance of equity securities, our existing shareholders may
experience significant dilution. Furthermore, additional financing may not be
available when needed or, if available, such financing may not be on terms
favorable to our shareholders or us. If such sources of financing are
insufficient or unavailable, or if we experience shortfalls in anticipated
revenue or increases in anticipated expenses, we may need to slow down or stop
the expansion of our regional deployment, including our Customer Network
Facility sites and further reduce our marketing and development efforts. Any of
these events could harm our business, financial condition or results of
operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk related to changes in interest rates. We
invest excess cash balances in cash equivalents and marketable securities. We
believe that the effect, if any, of reasonably possible near-term changes in the
interest rates on our financial position, results of operations, and cash flows
will not be material.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not involved currently in any legal proceedings that either
individually or taken as a whole, will have a material adverse effect on our
business, financial condition and results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(a) None.
(b) None.
(c) None
(d) Use of Proceeds of the Initial Public Offering
Our initial public offering, or IPO, was affected through a
Registration Statement on Form S-1 (File No. 333-85465) that was declared
effective by the SEC on February 7, 2000 and pursuant to which we sold an
aggregate of 4,000,000 shares of our Common stock at $12.00 per share. On March
7, 2000, the managing underwriters of our IPO, ING Barings LLC, SoundView
Technology Group, Inc., FAC/Equities, a division of First Albany Corporation and
DLJdirect, Inc., exercised the over-allotment option selling an additional
600,000 shares of our Common stock. The proceeds received net of underwriting
discounts and commissions, and other transaction costs were approximately
$49,644,000.
From the effective date of the Registration Statement through September
30, 2000, we utilized the proceeds from the initial public offering and
underwriters' over-allotment as follows:
Repayment of debt ................................ $ 1,418,000
Payment of other obligations ..................... 544,000
Capital Expenditures ............................. 7,502,000
Working Capital Requirements ..................... 13,786,000
------------
Total ............................................ $23,250,000
============
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Unused proceeds of the initial public offering are currently invested
in debt and equity securities diversified among high-credit quality securities
in accordance with our investment policy.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
FACTORS AFFECTING FUTURE OPERATING RESULTS
This quarterly report on Form-10-Q contains forward-looking statements
concerning our future products, expenses, revenue, liquidity and cash needs as
well as our plans and strategies. These forward-looking statements are based on
current expectations and we assume no obligation to update this information.
Numerous factors could cause actual results to differ significantly from the
results described in these forward-looking statements, including the following
risk factors.
WE ONLY RECENTLY BEGAN TO IMPLEMENT OUR CURRENT BUSINESS STRATEGY. AS A RESULT,
YOU MAY NOT BE ABLE TO EVALUATE OUR BUSINESS PROSPECTS BASED ON OUR HISTORICAL
RESULTS.
In 1998, we began to implement our current business strategy of
targeting small and medium sized enterprises in high growth secondary markets
not only within the mid-Atlantic area of the United States, but also outside of
this area. Prior to 1998, we conducted business solely in the mid-Atlantic area,
particularly in Eastern Pennsylvania. Consequently, the evaluation of our future
business prospects is difficult because our historical results for periods
during which we were implementing our current business strategy are limited. On
October 10, 2000, we revised our business plan. The revised business plan
temporarily reduced the number of markets where we execute our business plan
from 20 to 8.
WE HAVE A HISTORY OF LOSSES AND EXPECT FUTURE LOSSES.
We have incurred net losses since our inception. For the years ended
December 31, 1996, 1997, 1998 and 1999, we had losses of $115,000, $322,000,
$1.3 million and $5.6 million, respectively. On a pro forma basis, assuming that
the acquisition of Internet Unlimited, Inc. was consummated on January 1, 1998,
we would have incurred net losses of approximately $2.6 million, or 42% of
revenues, for the year ended December 31, 1998 and approximately $6.5 million,
or 71% of revenues, for year ended December 31, 1999. Under our current business
strategy, we expect to continue to operate at a loss for the foreseeable future.
In order to achieve profitability, we must develop and market products
and services that gain broad commercial acceptance by small and medium sized
enterprises and residential customers in our target regions. We cannot give any
assurances that our products and services will ever achieve broad commercial
acceptance among our customers. Although our revenues have increased each year
since we began operations, we cannot give any assurances that this growth in
annual revenues will continue or lead to our profitability in the future.
Therefore, we cannot predict whether we will obtain or sustain positive
operating cash flow or generate net income in the future.
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IT IS UNLIKELY THAT INVESTORS WILL RECEIVE A RETURN ON OUR COMMON STOCK THROUGH
THE PAYMENT OF CASH DIVIDENDS.
We have never declared or paid cash dividends on our Common stock and
have no intention of doing so in the foreseeable future. We have had a history
of losses and expect to operate at a net loss for the next several years. These
net losses will reduce our stockholders' equity. For the nine months ended
September 30, 2000, we had a net loss of $17.7 million. We cannot predict what
the value of our assets or the amount of our liabilities will be in the future.
OUR OPERATING RESULTS FLUCTUATE DUE TO A VARIETY OF FACTORS AND ARE NOT A
MEANINGFUL INDICATOR OF FUTURE PERFORMANCE.
Our operating results have fluctuated in the past and may fluctuate
significantly in the future, depending upon a variety of factors, including:
the timing of costs relating to the construction of our
customer network facilities;
the timing of the introduction of new products and services;
changes in pricing policies and product offerings by us or our
competitors; and
fluctuations in demand for Internet access and enhanced
products and services.
Therefore, we believe that period-to-period comparisons of our
operating results are not necessarily meaningful and cannot be relied upon as
indicators of future performance. If our operating results in any future period
fall below the expectations of analysts and investors, the market price of our
Common stock would likely decline.
THE MARKET PRICE AND TRADING VOLUME OF OUR COMMON STOCK ARE VOLATILE.
The market price of our Common stock has fluctuated significantly in
the past, and is likely to continue to be highly volatile. In addition, the
trading volume in our Common stock has fluctuated, and significant price
variations can occur as a result. We cannot assure you that the market price of
our Common stock will not fluctuate or continue to decline significantly in the
future. In addition, the U.S. equity markets have from time to time experienced
significant price and volume fluctuations that have particularly affected the
market prices for the stocks of technology and telecommunications companies.
These broad market fluctuations may materially adversely affect the market price
of our Common stock in future. Such variations may be the result of changes in
our business, operations or prospects, announcements of technological
innovations and new products by competitors, new contractual relationships with
strategic partners by us or our competitors, proposed acquisitions by us or our
competitors, financial results that fail to meet public market analyst
expectations, regulatory considerations and domestic and international market
and economic conditions.
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WE MAY BE UNABLE TO MAINTAIN THE STANDARDS FOR LISTING ON THE NASDAQ NATIONAL
MARKET, WHICH COULD MAKE IT MORE DIFFICULT FOR INVESTORS TO DISPOSE OF OUR
COMMON STOCK AND COULD SUBJECT OUR COMMON STOCK TO THE "PENNY STOCK" RULES.
Our Common stock is listed on the Nasdaq National Market. Nasdaq
requires listed companies to maintain standards for continued listing, including
either a minimum bid price for shares of a company's stock or a minimum tangible
net worth. For example, Nasdaq requires listed companies to maintain a minimum
bid price of at least $1.00. On October 9, 2000, our closing minimum bid price
was $0.96. If our closing bid price continues to be below $1.00 for a period of
30 consecutive days, we will be in violation of the Nasdaq continued listing
standards. If we are unable to maintain these standards, our Common stock could
be delisted. Trading in our stock would then be conducted on the Nasdaq Small
Cap Market unless we are unable to meet the requirements for inclusion. If we
were unable to meet the requirements for inclusion in the Small Cap Market, our
Common stock would be traded on an electronic bulletin board established for
securities that do not meet the Nasdaq listing requirements or in quotations
published by the National Quotation Bureau, Inc. that are commonly referred to
as the "pink sheets". As a result, it could be more difficult to sell, or obtain
an accurate quotation as to the price of our Common stock.
In addition, if our Common stock were delisted, it would be subject to
the so-called penny stock rules. The SEC has adopted regulations that define a
"penny stock" to be any equity security that has a market price of less than
$5.00 per share, subject to certain exceptions. For any transaction involving a
penny stock, unless exempt, the rules impose additional sales practice
requirements on broker-dealers subject to certain exceptions.
For transactions covered by the penny stock rules, a broker-dealer must
make a special suitability determination for the purchaser and must have
received the purchaser's written consent to the transaction prior to the sale.
The penny stock rules also require broker-dealers to deliver monthly statements
to penny stock investors disclosing recent price information for the penny stock
held in the account and information on the limited market in penny stocks. Prior
to the transaction, a broker-dealer must provide a disclosure schedule relating
to the penny stock market. In addition, the broker-dealer must disclose the
following:
o commissions payable to the broker-dealer and the registered
representative; and
o current quotations for the security as mandated by the
applicable regulations.
If our Common stock were delisted and determined to be a "penny stock,"
a broker-dealer may find it to be more difficult to trade our Common stock, and
an investor may find it more difficult to acquire or dispose of our Common stock
in the secondary market.
FUTURE SALES OF OUR COMMON STOCK COULD REDUCE THE PRICE OF OUR STOCK AND OUR
ABILITY TO RAISE CASH IN FUTURE EQUITY OFFERINGS.
No prediction can be made as to the effect, if any, that future sales
of shares of Common stock or the availability for future sale of shares of
Common stock or securities convertible into or exercisable for our Common stock
will have on the market price of our Common stock. Sale, or the availability for
sale, of substantial amounts of Common stock by existing stockholders under Rule
144, through the exercise of registration rights or the issuance of shares of
Common stock upon the exercise of stock options or warrants, or the perception
that such sales or issuances could occur, could adversely affect prevailing
market prices for our Common stock and could materially impair our future
ability to raise capital through an offering of equity securities.
OUR EXPANSION EFFORTS MAY NOT BE SUCCESSFUL IN OUR NEW TARGET REGIONS BECAUSE
OUR BUSINESS GROWTH STRATEGY IS LARGELY UNTESTED.
Our growth strategy includes building Customer Network Facility sites
in high growth secondary markets where we do not currently operate. In each
market, we will target primarily small and medium sized enterprise customers.
Since our growth strategy is largely untested, we cannot give any assurances
that we will be able to successfully implement it in our target regions.
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<PAGE>
Our success will depend upon:
our ability to identify attractive target regions outside of
the mid-Atlantic area;
our ability to rapidly deploy additional customer network
facility sites; and
our ability to replicate our sales and marketing efforts.
Our ability to successfully implement our business strategy, and the
expected benefits to be obtained from our strategy, may be adversely affected by
a number of factors, such as unforeseen costs and expenses, technological
change, economic downturns, competitive factors or other events beyond our
control.
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000, OUR LARGEST CUSTOMER ACCOUNTED FOR
23% OF OUR TOTAL REVENUES. THE LOSS OF THIS CUSTOMER COULD HARM OUR RESULTS OF
OPERATIONS.
Although our primary business is to target small and medium sized
enterprises, we have derived a significant portion of our revenues from a small
number of our business customers that are not small and medium sized
enterprises. For example, Lucent Technologies, Inc. accounted for 7% of total
revenues for the year ended December 31, 1999 and 11% of total revenues for the
fiscal year ended December 31, 1998. Microsoft's WebTV Networks, Inc. accounted
for 23% of total revenues for the nine months ended September 30, 2000, 21% of
total revenues for the year ended December 31, 1999 and 9% of total revenues for
the fiscal year ended December 31, 1998. If we are unable to implement our
strategy of targeting small and medium sized enterprises, we will continue to be
substantially dependent upon revenues from our larger customers. We expect
revenues from these customers to vary from year to year. Our agreement with
Microsoft's WebTV Networks may be terminated upon 120 days notice. The loss of
any of our significant customers or a significant decrease in revenues from
these customers could harm our results of operations.
IN THE FUTURE, WE MAY BE UNABLE TO EXPAND OUR SALES, TECHNICAL SUPPORT AND
CUSTOMER SUPPORT INFRASTRUCTURE, WHICH MAY HINDER OUR ABILITY TO GROW AND MEET
CUSTOMER DEMANDS.
Under our modified business plan we rely on a combination of a
customer-centric, consultative sales approach and a centrally based technical
support and customer support staff to build a long-term relationship with
customers. On October 10, 2000, we terminated 44 employees across all
departments of the Company. This involuntary termination may make it more
difficult to attract and retain employees. If, in the future, we are unable to
expand our sales force and our technical support and customer support staff, our
business would be harmed because this would limit our ability to obtain new
customers, sell products and services and provide existing customers with a high
level of technical support.
ON OCTOBER 10, 2000, WE INITIATED A MODIFICATION TO OUR STRATEGIC PLAN. IF WE
ARE UNABLE TO ACHIEVE THE EXPECTED COST SAVINGS AND REDUCTION IN CASH
CONSUMPTION UNDER THIS PLAN, WE MAY HAVE TO FURTHER MODIFY OUR BUSINESS PLAN OR
OUR BUSINESS COULD BE HARMED.
On October 10, 2000 we announced a new business plan developed by
management and approved by the board of directors. This plan calls for us to
suspend our planned opening of new markets and to limit our field sales efforts
to eight markets located in Pennsylvania and New Jersey. We anticipate as a
result of this new business plan, that we will not require additional funding in
the next twelve months. If we do not achieve the expected cost savings and
reduction in cash consumption under this plan, then we will need to seek
additional capital from public or private equity or debt sources to fund our
business plan. Given that our stock price is currently trading below $1.00 and
it may be difficult or impossible to raise additional capital in the public
market in the future. In addition, we cannot be certain that we will be able to
raise additional capital through debt or private financing at all or on terms
acceptable to us. If alternative sources of financing are insufficient or
unavailable, we may be required to further modify our growth and operating plans
in accordance with the extent of available financing.
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In the past, we have been able to provide limited services to customers
90 days after the date construction begins for a new Customer Network Facility.
There are many factors, however, which may affect our ability to expand rapidly
into target regions, including availability of equipment and telecommunications
services. Therefore, there can be no assurances that we will be able to expand
into our target regions in our anticipated time frame. If we are unable to
rapidly expand into our target regions, our business and results of operations
will be harmed.
WE FACE SIGNIFICANT AND INCREASING COMPETITION IN OUR INDUSTRY, WHICH COULD
CAUSE US TO LOWER PRICES RESULTING IN REDUCED REVENUES.
The growth of the Internet access and related services market and the
absence of substantial barriers to entry have attracted many start-ups as well
as existing businesses from the telecommunications, cable, and technology
industries. As a result, the market for Internet access and related services is
very competitive. We anticipate that competition will continue to intensify as
the use of the Internet grows. Current and prospective competitors include:
national Internet service providers and regional and local
Internet service providers, including providers of free
dial-up Internet access;
national and regional long distance and local
telecommunications carriers;
cable operators and their affiliates;
providers of Web hosting, colocation and other Internet-based
business services;
computer hardware and other technology companies that bundle
Internet connections with their products; and
terrestrial wireless and satellite Internet service providers.
We believe that the number of competitors we face is significant and is
constantly changing. As a result, it is extremely difficult for us to accurately
identify and quantify our competitors. In addition, because of the constantly
evolving competitive environment, it is extremely difficult for us to determine
our relative competitive position at any given time.
As a result of an increase in the number of competitors, and vertical
and horizontal integration in the industry, we currently face and expect to
continue to face significant pricing pressure and other competition in the
future. Advances in technology and changes in the marketplace and the regulatory
environment will continue, and we cannot predict the effect that ongoing or
future developments may have on us or the pricing of our products and services.
We believe that the following are the primary competitive factors in
our market:
pricing;
quality and breadth of products and services;
ease of use;
personal customer support and service; and
brand awareness.
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Many of our competitors have significantly greater market presence,
brand-name recognition, and financial resources than we do. In addition, all of
the major long distance telephone companies, also known as interexchange
carriers, offer Internet access services. The recent reforms in the federal
regulation of the telecommunications industry have created greater opportunities
for local exchange carriers, including incumbent local exchange carriers and
competitive local exchange carriers, to enter the Internet access market. In
order to address the Internet access requirements of the current business
customers of long distance and local carriers, many carriers are integrating
horizontally through acquisitions of or joint ventures with Internet service
providers, or by wholesale purchase of Internet access from Internet service
providers. In addition, many of the major cable companies and other alternative
service providers, such as those companies utilizing wireless and satellite-
based service technologies, have announced their plans to offer Internet access
and related services. While few of these larger companies have focused on our
key customer base of small and medium sized enterprises in our target markets,
it is possible that they will do so in the future. Accordingly, we may
experience increased competition from traditional and emerging
telecommunications providers. Many of these companies, in addition to their
substantially greater network coverage, market presence, and financial,
technical and personnel resources, also already provide telecommunications and
other services to many of our target customers. Furthermore, they may have the
ability to bundle Internet access with basic local and long distance
telecommunications services, which we do not currently offer. This bundling of
services may harm our ability to compete effectively with them and may result in
pricing pressure on us that would reduce our earnings.
OUR GROWTH DEPENDS ON THE CONTINUED ACCEPTANCE BY SMALL AND MEDIUM SIZED
ENTERPRISES OF THE INTERNET FOR COMMERCE AND COMMUNICATION.
If the use of the Internet by small and medium sized enterprises for
commerce and communication does not continue to grow, our business and results
of operations will be harmed. Our products and services are designed primarily
for the rapidly growing number of business users of the Internet. Commercial use
of the Internet by small and medium sized enterprises is still in its early
stages. Despite growing interest in the commercial uses of the Internet, many
businesses have not purchased Internet access and related services for several
reasons, including:
lack of inexpensive, high-speed connection options;
a limited number of reliable local access points for business
users;
lack of affordable electronic commerce solutions;
limited internal resources and technical expertise;
inconsistent quality of service; and
difficulty in integrating hardware and software related to
Internet based business applications.
In addition, we believe that many Internet users lack confidence in the
security of transmitting their data over the Internet, which has hindered
commercial use of the Internet. Technologies that adequately address these
security concerns may not be developed.
The adoption of the Internet for commerce and communication
applications, particularly by those enterprises that have historically relied
upon alternative means, generally requires the understanding and acceptance of a
new way of conducting business and exchanging information. In particular,
enterprises that have already invested substantial resources in other means of
conducting commerce and exchanging information may be reluctant or slow to adopt
a new strategy that may make their existing personnel and infrastructure
obsolete.
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OUR SUCCESS DEPENDS ON THE CONTINUED DEVELOPMENT OF INTERNET INFRASTRUCTURE.
The recent growth in the use of the Internet has caused periods of
performance degradation, requiring the upgrade by providers and other
organizations with links to the Internet of routers and switches,
telecommunications links and other components forming the infrastructure of the
Internet. We believe that capacity constraints caused by rapid growth in the use
of the Internet may impede further development of the Internet to the extent
that users experience increased delays in transmission or reception of data or
transmission errors that may corrupt data. Any degradation in the performance of
the Internet as a whole could impair the quality of our products and services.
As a consequence, our future success will be dependent upon the reliability and
continued expansion of the Internet.
WE RELY ON A LIMITED NUMBER OF VENDORS AND SERVICE PROVIDERS, SOME OF WHICH ARE
OUR COMPETITORS. THIS MAY ADVERSELY AFFECT THE FUTURE TERMS OF OUR
RELATIONSHIPS.
We rely on other companies to supply key components of our network
infrastructure, which are available only from limited sources. For example, we
currently rely on routers, switches and remote access devices from Lucent
Technologies, Inc., Cisco Systems, Inc. and Nortel Networks Corporation. We
could be adversely affected if any of these products were no longer available on
commercially reasonable terms, or at all. From time to time, we experience
delays in the delivery and installation of these products and services, which
can lead to the loss of existing or potential customers. We do not know that we
will be able to obtain such products in the future cost-effectively and in a
timely manner. Moreover, we depend upon MCI WorldCom, Inc., and Sprint as our
primary backbone providers. These companies also sell products and services that
compete with ours. Our agreements with our primary backbone providers are fixed
price contracts with terms ranging from one to three years. Our backbone
providers operate national or international networks that provide data and
Internet connectivity and enable our customers to transmit and receive data over
the Internet. Our relationship with these backbone providers could be adversely
affected as a result of our direct competition with them. Failure to renew these
relationships when they expire or enter into new relationships for such services
on commercially reasonable terms or at all could harm our business, financial
condition and results of operations.
WE NEED TO RECRUIT AND RETAIN QUALIFIED PERSONNEL OR OUR BUSINESS COULD BE
HARMED.
Competition for highly qualified employees in the Internet service
industry is intense because there are a limited number of people with an
adequate knowledge of and significant experience in our industry. Our success
depends largely upon our ability to attract, train and retain highly skilled
management, technical, marketing and sales personnel and upon the continued
contributions of such people. Since it is difficult and time consuming to
identify and hire highly qualified employees, we cannot assure you of our
ability to do so. Our failure to attract additional highly qualified personnel
could impair our ability to grow our operations and services to our customers.
WE COULD EXPERIENCE SYSTEM FAILURES AND CAPACITY CONSTRAINTS, WHICH COULD RESULT
IN THE LOSS OF OUR CUSTOMERS OR LIABILITY TO OUR CUSTOMERS.
The continued operation of our network infrastructure depends upon our
ability to protect against:
downtime due to malfunction or failure of hardware or
software;
overload conditions;
power loss or telecommunications failures;
human error;
natural disasters; and
sabotage or other intentional acts of vandalism.
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Any of these occurrences could result in interruptions in the services
we provide to our customers and require us to spend substantial amounts of money
repairing and replacing equipment. In addition, we have finite capacity to
provide service to our customers under our current infrastructure. Because
utilization of our network is constantly changing depending upon customer use at
any given time, we maintain a level of capacity that we believe to be adequate
to support our current customer base. If we obtain additional customers in the
future, we will need to increase our capacity to maintain the quality of service
that we currently provide our customers. If customer usage exceeds our capacity
and we are unable to increase our capacity in a timely manner, our customers may
experience interruptions in or decreases in quality of the services we provide.
As a result, we may lose current customers or incur significant liability to our
customers for any damages they suffer due to any system downtime as well as the
possible loss of customers.
OUR NETWORK MAY EXPERIENCE SECURITY BREACHES, WHICH COULD DISRUPT OUR SERVICES.
Our network infrastructure may be vulnerable to computer viruses,
break-ins and similar disruptive problems caused by our customers or other
Internet users. Computer viruses, break-ins or other problems caused by third
parties could lead to interruptions, delays or cessation in service to our
customers. There currently is no existing technology that provides absolute
security, and the cost of minimizing these security breaches could be
prohibitively expensive. We may face liability to customers for such security
breaches. Furthermore, such incidents could deter potential customers and
adversely affect existing customer relationships.
WE FACE POTENTIAL LIABILITY FOR INFORMATION DISSEMINATED THROUGH OUR NETWORK.
It is possible that claims could be made against Internet service
providers in connection with the nature and content of the materials
disseminated through their networks. The law relating to the liability of
Internet service providers due to information carried or disseminated through
their networks is not completely settled. While the U.S. Supreme Court has held
that content transmitted over the Internet is entitled to the highest level of
protection under the U.S. Constitution, there are federal and state laws
regarding the distribution of obscene, indecent, or otherwise illegal material,
as well as material that violates intellectual property rights which may subject
us to liability. Several private lawsuits have been brought in the past and are
currently pending against other entities which seek to impose liability upon
Internet service providers as a result of the nature and content of materials
disseminated over the Internet. If any of these actions succeed, we might be
required to respond by investing substantial resources or discontinuing some of
our service or product offerings, which could harm our business.
NEW LAWS AND REGULATIONS GOVERNING OUR INDUSTRY COULD HARM OUR BUSINESS.
We are subject to a variety of risks that could materially affect our
business due to the rapidly changing legal and regulatory landscape governing
Internet access providers. For example, the Federal Communications Commission
currently exempts Internet access providers from having to pay per-minute access
charges that long-distance telecommunications providers pay local telephone
companies for the use of the local telephone network. In addition, Internet
access providers are currently exempt from having to pay a percentage of their
gross revenues as a contribution to the federal universal service fund. Should
the Federal Communications Commission eliminate these exemptions and impose such
charges on Internet access providers, this would increase our costs of providing
dial-up Internet access service and could have a material adverse effect on our
business, financial condition and results of operations.
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We face risks due to possible changes in the way our suppliers are
regulated which could have an adverse effect on our business. For example, most
states require local exchange carriers to pay reciprocal compensation to
competing local exchange carriers for the transport and termination of Internet
traffic. However, in February 1999, the Federal Communications Commission
concluded that at least a substantial portion of dial-up Internet traffic is
jurisdictionally interstate, which could ultimately eliminate the reciprocal
compensation payment requirement for Internet traffic. Should this occur our
telephone carriers might no longer be entitled to receive payment from the
originating carrier to terminate traffic delivered to us. The Federal
Communications Commission has launched an inquiry to determine a mechanism for
covering the costs of terminating calls to Internet service providers, but in
the interim state commissions will determine whether carriers will receive
compensation for such calls. If the new compensation mechanism that may be
adopted by the Federal Communications Commission increases the costs to our
telephone carriers for terminating traffic to us, or if states eliminate
reciprocal compensation payments, our telephone carriers may increase the price
of service to us in order to recover such costs. This could have a material
adverse effect on our business, financial condition and results of operations.
We face risks due to possible changes in the way our competitors are
regulated which could have an adverse effect on our business. For example, the
Federal Communications Commission is considering measures that could stimulate
the development of high-speed telecommunications facilities and make it easier
for operators of these facilities to obtain access to customers. Such favorable
regulatory measures could enhance the viability of our competitors in the
Internet access marketplace. In addition, changes in the regulatory environment
may provide competing Internet service providers the right of access to the
cable systems of local franchised cable operators. The adoption of open access
to cable systems by Internet service providers could harm our business.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
FASTNET Corporation:
Date: November 14, 2000 /s/ David K. Van Allen
-----------------------------------
David K. Van Allen
Chief Executive Officer
Date: November 14, 2000 /s/ Stanley F. Bielicki
-----------------------------------
Stanley F. Bielicki
Chief Financial Officer
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